The Main Determinants of Inflation in Nigeria


WP/94/76-EA
The Main Determinants of Inflation in Nigeria by Gary G. Moser


The inflation rate in Nigeria has increased steadily and markedly
since independence. By the end of 1993, inflation had reached 60 percent
(on an end-period basis), and real per capita income growth had stalled.
This paper reviews previous empirical studies on the determinants of
inflation in Nigeria, analyzes the dominant factors influencing inflation,
presents the empirical results of a reduced-form elasticities model, and
discusses the policy implications of those empirical results.

The rate of inflation in Nigeria is based on a composite urban and
rural consumer price index (CPI), with food items representing almost
70 percent of the CPI market basket. Consequently, factors affecting
food prices dominate movements in the CPI, including agroclimatic
conditions, wages, domestic inputs, and import prices. In reviewing
episodes of inflation during 1985-93, this paper finds that money growth,
resulting largely from expansionary fiscal policies, combined with
agroclimatic conditions, significantly influenced movements in the rate
of inflation. The devaluation of the naira, as expected, also affected
inflation during the period.

The relative weights of the key factors influencing the rate of
inflation (money, income, and exchange rates) are tested empirically using
a semi-reduced form model. Given the apparent central role of expansionary
fiscal and monetary policies in the inflation process, an expanded monetary
model of inflation is employed. The results of the analysis confirm the
basic findings of earlier studies, namely, that monetary expansion, driven
mainly by expansionary fiscal policies, explains to a large degree the
inflationary process in Nigeria. Regarding the exchange rate, the impact
of a depreciation of the naira on the rate of inflation was found to be
significant, but that impact could be moderated with appropriately tight
fiscal and monetary policies. Given the considerable role of food
commodities in the CPI, agroclimatic conditions (rainfall) were also found
to influence overall movements in prices significantly.